Mike Kueber's Blog

February 10, 2012

The Zuckerberg Tax

Filed under: Economics,Finances,Investing,Issues,Law/justice,Politics — Mike Kueber @ 4:14 am
Tags: ,

A recent op-ed piece in the NY Times recommended that America adopt a “marked to market” tax – something it called the Zuckerberg Tax in honor of Facebook founder Mark Zuckerberg.  Essentially the tax would require the wealthiest Americans to pay taxes on their capital gains every year, regardless of whether they actually sold their assets – i.e., individuals would be taxed on their paper gains. 

That makes sense to me.  Individuals who are getting super-rich should not be able to avoid contributing toward the provision of government services by holding onto their capital assets.  The column reported that Apple’s Steven Jobs never sold any of his Apple stock, and thus never paid capital-gains taxes on his billions of dollars of capital gains.

Even more troubling is the report in the column regarding the tax treatment of capital gains that are never realized before the owner dies and passes them to heirs.  According to the column, neither the estate nor the heir pay capital gains at the time the capital is transferred, and inexplicably instead of requiring the heir to assume the deceased’s cost basis for the assets, the heir’s basis becomes the market value of the assets at the time of the transfer. 

For example, Steve Jobs buys ten million shares of Apple for $10 a share, and then holds them until his death, when they are worth $300 a share.  Thus, he never realized any capital gains and didn’t pay a penny of taxes.  His wife then receives the shares through the Jobs’ will, and she holds them for another year before selling them for either $290 a share or $310 a share.

If she sells them for $290 a share, she will receive $2.9 billion from an initial investment of $100 million, yet she can actually declare a $100 million loss and offset that loss against other capital gains.  If she sells them for $310 a share, she will receive $3.1 billion, but will have to declare capital gains of only $100 million, on which she will pay capital-gains tax of 15% or $15 million.  That’s an incredibly low tax rate (.5%) on the $3 billion in capital gains that she and her husband experienced.

The Zuckerberg Tax seems like a good idea, even though it will have tough sledding.  There is no reason, however, for failing to assess the capital-gains tax when property is transferred by someone’s death.

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3 Comments »

  1. Gosh, I’m a liberal, and the “Zuckerberg tax” doesn’t seem very fair to me. It just increases the risk to the investor, and makes it more difficult for the non-wealthy investor to make the most economically productive investments (i.e. Buffett-style long-term buy-and-hold investments). Without the option of paying taxes from proceeds, many smaller investors would have to either pony up taxes from their salaries, or cash in part of the stocks every year they rise, thereby forgoing at least part of the benefit of compound interest.

    Remember, stocks go down as well as up. Let’s try an example: Joe Q. Investor buys some mortgage securities in 2006 for $20,000, and in 2007 they’re worth $30,000. So he has to come up with $1,500 for his capital gains tax. In 2008, his securities are worth $40,000, so he has to come up with another $1,500. However, in 2009, his investments crash, and are now worth $5,000. So he’s paid $3,000 capital gains tax on a $15,000 loss. So next time has has some extra money, he’s going to buy granite counter tops for his kitchen instead of investing in a way that is of greater social benefit.

    I’m totally with you on the inheritance angle, though. I got a bunch from my father’s estate, and was shocked to learn that the basis of the investments I received just–poof!–disappeared. It doesn’t seem fair or reasonable, even when I was the beneficiary.

    By the way, I’ve wondered this for a long time: is your name pronounced KYOO-BER, or KOY-BUHR (or some other way that I haven’t imagined) ?

    Comment by Anonymous — February 10, 2012 @ 4:56 am | Reply

    • Anonymous, I suspected all along that you were a trust-fund baby, and I was correct. Just kidding.

      My name is pronounced Key’-bur. I haven’t studied the German language, but I’ve seen lots of German names that have two vowels in the first syllable and invariably the first vowel is silent. Many people call me Keebler, after the cookies. Your KYOO-BER is the most common pronunciation; no one has ever pronounced it correctly the first time.

      Your Zuckerberg example is flawed in an least two ways – (1) the Zuckerberg tax is applied only to the Top 1%, and those people already buy all the consumer goods that they desire, and (2) even if it did apply to your example, Joe Q would have $35k in capital losses to reduce his future taxes. Plus, Romney will eliminate the capital-gains tax on people who earn less than $200k.

      Comment by Mike Kueber — February 10, 2012 @ 11:16 am | Reply

      • Okay, I didn’t get that the tax proposal applied only to the top 1%. I still think that it misaligns incentives, but hey.

        For what it’s worth, I’m a German trust fund baby: the German pronunciation of your name would be “KOY-buhr.”

        Lastly, nothing could be less relevant than Romney’s capital gains proposal. That guy is toast.

        Comment by Anonymous — February 10, 2012 @ 3:17 pm


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